Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

When it comes to being the target of an activist hedge fund, it looks as if Morgan Stanley got off easy.

ValueAct, which disclosed an almost 2 percent stake in the Wall Street stalwart this week, is acting more like a cheerleader than a hijacker. Absent, at least for now, is a list of activist demands. In its place is praise for the transformation Morgan Stanley is undertaking.

Big Fan

ValueAct took a nearly 2 percent stake in Morgan Stanley but isn't pressing for changes

Source: Bloomberg

Still, the arrival of an activist on the doorstep of a too-big-to-fail bank has rekindled imaginations regarding how shareholder agitation could revive the chronically depressed valuations of some of the biggest U.S. banks.

Some of the items that are often at the top of the activist's list of demands of -- take advantage of cheap money to increase the dividend, buy back more shares or both -- are off the table when it comes to the too-big-to-fail crowd. That's because the Federal Reserve has the final word on buybacks and dividends as part of its yearly review of banks' capital plans.

As a result, some of the biggest activist hedge funds have steered clear of financial shares, ValueAct notwithstanding:

The other route for an activist to take would be to go nuclear: demand a breakup of the firm, a transformative merger or a house-cleaning of the board and executive suites. Even though any attempt to foment a breakup or merger would run into the regulatory red-tape machine and require a long-term commitment of capital with a significant risk of failure, it's the stuff that investor daydreams are made of -- whether it be Citigroup, Bank of America or maybe now Morgan Stanley. The parts of the big banks, the theory goes, are worth more separately than what the market is valuing them together.

However, imagining an activist campaign successfully breaking up Morgan Stanley is like imagining Taylor Swift and Kanye West forming a band together: It may sound like a profitable idea, but certain relationships would prevent it.

Remember the financial crisis? When banks fanned out across the globe in search of knights in shining armor to help prevent their demise with a few billion dollars in investable capital? Morgan Stanley found its knight in Japan with Mitsubishi UFJ, which bought a 22 percent stake for $9 billion.

When you add that stake to the stakes of pacifist mutual fund and ETF companies that can be relied on to never side with agitators -- like Vanguard, BlackRock and State Street -- and others that hardly ever do, it's hard to see the math working out for an activist looking to stage any sort of mutiny by proxy without getting Mitsubishi on its side.

Is that possible? It seems doubtful, considering Mitsubishi relies on its joint venture with Morgan Stanley to compete with rival Nomura in Japanese league tables. While the interconnection is a source of volatility for the Japanese bank's earnings and it may cause some regulatory headaches for the New York bank, the relationship seems to be only growing stronger with the pair announcing plans to hire more investment bankers earlier this year.

So it's no wonder ValueAct has to take a pacifist route this time. But any other activist who's tempted to follow ValueAct's path into Morgan Stanley with dreams of breaking up the bank or otherwise creating havoc would likely meet a dead end, so it's hard to imagine that happening.

What, then, of the other big big banks? Activists are apparently being courted by some investors to agitate for changes at Bank of America, the Wall Street Journal reported. But with market capitalization of $155 billion (Bank of America) or $135 billion (Citigroup) or $238 billion (JPMorgan Chase), it would take a lot of ammunition to take down an elephant like that, and ammunition is running thin for activist hedge funds. About $4.3 billion was withdrawn from activist funds in the first quarter, according to HFR, as they -- like most hedge funds -- struggle to beat the market.

Acting Up

While shares of companies targeted by activists have outperformed the market, the hedge funds doing the agitating have not

Source: Bloomberg

Note: Indexed to 100 at end of 2008. Bloomberg tickers are HFRIACT, SPUACTUP, SPXT

Still, it's possible to imagine someone launching an activist campaign against one of the firms, considering Carl Icahn seems to have had some success in nudging American International Group in the general direction he wanted, and the depressed valuations of big banks stand out in an otherwise richly valued stock market.

There's also the intriguing fact that the interests of activists could align nicely with the interest of some politicians who want to break up the banks, though these politicians may hold as much disdain for hedge-fund "wolf packs" as they do for big banks. (Search "Brokaw Act" for further reading.) Politicians, they say, make strange bedfellows. A wolf pack would make for a strange bedfellow indeed.

But those pesky government regulators still remain. If you don't have a white knight like Morgan Stanley, they might be the next best thing at warding off the activist horde.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.